ZIMBABWE'S ongoing currency crisis exemplifies a perpetual loop of financial instability, characterised by cyclical depreciations and policy interventions that often provide only transient relief.
Since 2020, Zimbabwe’s currency has undergone severe annual depreciations, averaging nearly 90% against the US dollar (USD) annually for each respective year, despite multiple government measures aimed at stabilising the exchange rate. The introduction of the Zimbabwe Gold (ZiG) in April was the latest attempt to address these issues, but it has not broken the pattern of volatility and economic hardship.
In 2020, the Reserve Bank of Zimbabwe (RBZ) implemented the Dutch auction system, which saw the Zimbabwe dollar plunge by 64% year-to-date by May 23, 2023, and a further 26% in a single week, emphasising the currency’s vulnerability. The Dutch auction system was designed to narrow the gap between the official and parallel markets by allowing buyers to bid on the exchange rate until the allocation cap was met. However, the limited weekly allocation of US$15 million, juxtaposed with bids nearing US$60 million, underlined the persistent demand for foreign currency driven by rampant money supply growth. This imbalance perpetuated the premium in the parallel market.
The introduction of the ZiG in April 2024 was intended to stabilise the currency by pegging it to global gold prices. Initially, the ZiG demonstrated relative stability, depreciating by only 3% on the interbank market from April to September 2024. In stark contrast, the parallel market recorded a depreciation of 53%, resulting in a substantial exchange premium exceeding 100%. This divergence highlighted the persistent challenges of managing a dual exchange rate system, where the parallel market more accurately mirrors underlying economic conditions.
To contextualise the ongoing currency instability, examining the performance of the Zimbabwe dollar from 2020 reveals a consistent pattern of significant depreciation. In 2020, the re-introduced Zimbabwe dollar faced immediate pressures, losing substantial value against the US dollar. This trend continued annually, with 2021, 2022, and 2023 each witnessing approximately 90% depreciation rates, despite various stabilising measures such as the introduction of the foreign exchange auction system and adjustments in interest rates and reserve requirements.
A quantitative view of currency performance highlights the recurring failure of policy interventions to provide long-term stability. For instance, in 2020, the Zimbabwe /US dollar exchange rate began at around US$1:ZW$16 on the interbank and ended the year close to US$1:ZW$82. This depreciation trend continued, with the rate escalating to approximately US$1:ZW$109 by the end of 2021, and further to around US$1:ZW$684 by the end of 2022.
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By November 2023, the Zimbabwe dollar had depreciated to approximately US$1:ZW$5 790 on the official market and even higher on the parallel market where it hovered around US$1:ZW$8 500.
Applying a similar analysis to ZiG since its introduction reveals parallel trends. The initial pegging to gold prices was aimed at leveraging the intrinsic value of gold to stabilise the currency. However, the parallel market quickly exposed the underlying vulnerabilities. The 53% depreciation in the parallel market from April to September 2024 indicated significant market distrust and speculation. Predicting the prospective performance of Zimbabwe's local currency using historical data and trends suggests continued volatility and depreciation. Assuming the continuation of current policies and economic conditions, it is plausible to anticipate an annual depreciation rate of approximately 80% against the US dollar in 2024.
These projections, made in-house, underscore the severe challenges facing Zimbabwe’s monetary policy. To break the cycle of depreciation, the government and the RBZ need to implement comprehensive economic reforms. These reforms should address the excessive money supply growth, reduce fiscal deficits, and improve transparency in exchange rate management. Aligning the official exchange rate more closely with market forces and ensuring gradual, well-communicated policy changes will be crucial to restoring confidence and achieving long-term stability.
Duma is a financial analyst and accountant at Equity Axis, a leading media and financial research firm in Zimbabwe. — twdumah@gmail.com or tinashed@equityaxis.com, X: TWDuma_